June 10 (Bloomberg) -- Chrysler LLC won court permission to cancel 789 car dealership agreements, as a judge overruled objections from dealers who said their long family ownership and sales figures made them a boon to the reorganizing company.

U.S. Bankruptcy Judge Arthur Gonzalez in New York ruled yesterday that about a quarter of Chrysler’s dealers must stop selling the automaker’s vehicles immediately, as required under an agreement to sell the bankrupt car company’s best assets to a group led by Fiat SpA.

“This order shall be immediately effective and enforceable upon its entry,” Gonzalez wrote in the order, submitted about five hours after he heard objections from creditors.

Gonzalez also heard arguments from lawyers for rejected dealers who said they should be allowed to keep doing business until the deal with Fiat is completed, citing a delay in the closure created by an appeal to the U.S. Supreme Court.

After Gonzalez issued his decision, the Supreme Court yesterday issued its ruling that Indiana pension funds and consumer advocates challenging Chrysler’s asset sale hadn’t met the legal standard for emergency intervention to block the transaction.

Chrysler and the Fiat group planned to complete the sale today, said two people familiar with the matter.

Kevyn Orr, a lawyer for Chrysler, said at yesterday’s hearing that if dealers continue to sell cars or parts with the Chrysler trademark, they might face lawsuits for copyright violation or trademark infringement.

“There are around 2,300 assumed dealers going forward and they have rights too -- to the trademark of Chrysler, Jeep, Dodge,” Orr said. He said the automaker’s loans to operate in bankruptcy wouldn’t be enough to cover its costs without the cancellations of the dealer agreements.

Last-Minute Request

Adam Rogoff, a lawyer for Chrysler’s unsecured creditors, said a last-minute request made to Fiat to assume all the company’s estimated 3,200 dealerships was rejected verbally in court yesterday.

Gonzalez’s decision allows Chrysler to break contracts with about a quarter of its estimated 3,188 retail outlets, including seven dealers with AutoNation Inc., two with Lithia Motors Inc. and the Atlanta unit of Asbury Automotive Group Inc., according to court filings. Chrysler called the cancellations essential to its viability and sale to Fiat.

“Over time, the market for new motor vehicles has changed dramatically,” Peter Grady, Chrysler’s director of dealer operations, said in a filing. “Numerous other competitors selling a wide variety of vehicles, including Toyota, Honda, Hyundai and Kia, have entered the market and captured a larger share.”

Chrysler, based in Auburn Hills, Michigan, previously proposed cutting dealerships in metropolitan areas by as much as 50 percent.

Chrysler Guarantee

Chrysler guaranteed dealers losing their franchises that it will find others to take their unsold vehicles, and it extended a deadline to transfer the cars and trucks.

The company will give the 789 dealers being rejected until June 15 to sign paperwork to transfer vehicles, Orr said in court. That deadline had been yesterday.

“We are now close enough to guarantee that we will redistribute 100 percent of the affected inventory,” Steven Landry, Chrysler’s executive vice president for North American sales, said in a June 5 note to the rejected dealers.

Ambassador Auto Service, a Jeep dealership in Moscow, Idaho, had one vehicle left, an orange 2009 Compass with a list price of $23,000, owner Phillip Mack said yesterday. He said he was willing to sell the sport-utility vehicle for $18,500.

42,000 Vehicles

The dealers being eliminated had 42,000 vehicles in inventory on May 14, when the automaker announced which outlets it would keep. The rejected dealers sold 16,000 vehicles through last month.

Landry said in his June 5 note that Chrysler had found dealers willing to buy all but 400 vehicles from the rejected franchises and that it would be able to find buyers for the rest.

Stephen Lerner, a lawyer for a committee of dealers losing their franchises, told Gonzalez yesterday that any ruling canceling dealership agreements can’t be considered effective until the Fiat-led asset purchase is complete.

“The debtors made clear that this motion was inextricably intertwined with its sale motion,” Lerner said. “Rejection shouldn’t be effective until the sale closes.”

“Isn’t it a great country when a company can change its name and negate its debts?” said Aaron Beecher, 87, owner of ABC Motors, which sells Jeep and Chrysler vehicles in Valley Stream, New York. “It’s all Obama.”

The case is In re Chrysler LLC, 09-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Tiffany Kary in New York Bankruptcy Court at tkary@bloomberg.net; Bob Van Voris in New York at rvanvoris@bloomberg.net; Mike Ramsey in Southfield, Michigan, at mramsey6@bloomberg.net.

Last Updated: June 10, 2009 00:01 EDT